PayPal’s CEO on Creating Products for Underserved Markets

View more from the

Executive Summary

Back when the author was the CEO of Virgin Mobile, he accepted a challenge to live like a homeless person for 24 hours in New York City—with no money or credit card, no cell phone, just the clothes on his back. A few years later, when he was head of a division at American Express, he joined his leadership team in a variation on that experiment: They would spend an entire day trying to pay bills and transfer money the way people without bank accounts or credit cards have to. Those experiences increased his empathy for less-affluent people and his awareness of how difficult it is for them to manage and move money—and energized PayPal’s new strategy after Schulman joined the company as CEO, in 2014.

That strategy was to be a “customer champion” company and reorganize into just two groups: merchants and consumers. For merchants, PayPal would evolve its technology platform to enable more-intimate relationships with customers using mobile and software. For consumers, it would empower underserved citizens throughout the world to make more-secure, faster, easier, and less-expensive financial transactions. Within those two segments, the company has created or acquired a suite of products that target different markets, including Venmo for Millennials, Xoom for international digital payments, and PayPal Working Capital, which lends money to small businesses.

Cody Pickens

About a decade ago, when I was the CEO of Virgin Mobile, a colleague and I accepted an unusual challenge: Spend 24 hours living on the street in New York City as a homeless person would, with no money or credit cards, no cell phones, and just the clothes on our backs. Virgin had been supporting a charity for homeless youth, and during an employee event someone from the charity told us that the only way we could learn about the importance of its work was to experience the lives of the people it was serving. I agreed to do it. It was one of those experiences you never forget. We panhandled, and I wasn’t very good at it—it took me six hours to solicit enough money to buy a little food. Most people looked right past me, as if I were invisible. We spent a lot of time trying to find a safe place to sleep—we kept getting kicked out of places, and eventually we ended up in a skateboard park. I lived like that for only 24 hours, which of course is nothing—and it was during the summer, so the weather wasn’t terrible—but it was enough to give me a large dose of empathy for people who have to live on the street.

High Costs for the Poor

A few years later, when I was leading a division at American Express, I joined my leadership team in a variation on that experiment: We had to spend an entire day paying bills and moving money using methods available to people without bank accounts or credit cards. We stood in line at storefront check-cashing places, which are often in dangerous parts of the city. We went to retail establishments to pay utility bills with cash. We wired money. Managing finances this way can feel like a part-time job because of all the time spent in lines, and it’s very expensive—the fees are extremely high. We came away with a newfound appreciation for how costly it is to be poor, which helped drive our work at American Express to create new payment systems for people without access to traditional banks.

Since I joined PayPal as its chief executive, in 2014, this awareness of how difficult it is for less-affluent people to manage and move money has energized our strategy. PayPal is best known as a payment method for people making purchases on e-commerce websites, and that remains a vibrant part of our business—but we’re also aggressively expanding to become a software platform for a variety of financial transactions. Many people need these services. Data from the Federal Reserve shows that 47% of Americans could not raise $400 in case of an emergency—say, a car repair in order to get to work—within a month’s time. Two-thirds of Americans live from paycheck to paycheck. These are huge segments of the population, and if we can reimagine the ways in which they manage money and find new ways to help them save, we can make their lives better and also create business opportunities. As smartphones give people around the world access to powerful applications and platforms, we can go beyond traditional thinking about the “banked” versus the “unbanked” to reconceive how basic consumer financial transactions take place.

Marrying Two Goals

I grew up in New Jersey. My parents were professionals—my dad was a chemical engineer, and my mom was a college administrator—but we were far from affluent. We lived in a small apartment in Newark. My family had a history of caring about issues of social justice. My grandfather had been a union organizer, and my mother was a civil rights activist. They taught me from an early age to be concerned about people who didn’t have the advantages we did.

After college I joined AT&T, where I ended up spending 18 years. I changed roles quite often, which gave me an opportunity to learn the various functions of a business. I was a salesperson. I was in charge of customer service and strategy. I eventually ran our large consumer division, a $22 billion business. From AT&T, I went to Priceline as CEO. No matter how much experience you have running big divisions within a company, being the CEO is completely different—you have responsibilities to the board, to shareholders, to all the employees, and to all the customers. It was not an easy transition.

I left Priceline to start Virgin Mobile USA. We felt we could create a prepaid phone business that catered to less-affluent customers. While I was leading Virgin, I saw for the first time how a company could marry two goals—serving shareholders and being a force for good in the world. Richard Branson was my boss, and I learned a ton from him about being a champion for consumers—advocating for those who may not have a voice and working tirelessly to help ease pain points for them. As a leader, I try to define my role as dealing with the facts of any situation while providing inspiration to employees—finding something they can get excited about. If your company’s vision is about making life better for a group of consumers, that can motivate employees around a larger mission.

During my four years at American Express, I always looked at PayPal with some envy. PayPal had reached critical scale, both with consumers and with merchants, and it was more than a payment system—it was a technology-driven software company. I wasn’t looking to leave Amex, and when John Donahoe, then the CEO of eBay (which owned PayPal), called me about this job, I told him I wasn’t interested in running PayPal if it was going to remain a division of eBay. John confided that eBay wanted to spin off PayPal into an independent company, and that interested me. We spent a day together talking about leadership and the type of leader PayPal needed. By the end of the day, I was ready to leap at the opportunity—it seemed as if the position was tailor-made for me.

I joined PayPal in September 2014, and we immediately jumped into preparing the company for its IPO, slated for July 2015. But I also spent a great deal of time thinking about our overall strategy. PayPal had an amazing legacy—it had grown the number of transactions on its platform by 25% in the previous year, to almost 4 billion. Nobody else was close. It had done incredible work in improving its risk management and customer service. This was a successful company, and that in itself created challenges. For instance, it wasn’t outwardly evident that we needed to change. Sometimes it’s easier for a leader to come into a turnaround situation, where a company has no choice but to alter its way of doing things. PayPal had had tremendous success over its 15-year history, which made it harder to pivot toward new opportunities and create a feeling of urgency about seizing a new future.

A Champion for Customers

After six months of listening to employees and customers, I held a town hall meeting to talk about our strategy for long-term growth. One of the questions I had been asked frequently was “Are we a tech company or a financial services company?” It might have been easy to choose one or the other, but instead I said I wanted to become a customer-champion company—a company that focuses on various segments of the market and solves real problems for people. To inspire employees behind this strategy, I showed them where our current trajectory would take us and compared that with being a customer champion. For merchants, we needed to be much more than just a button on a website. We needed to evolve our technology platform to enable sellers to have more-intimate relationships with customers using mobile and software. In effect, we had to become the underlying operating system for digital commerce. And for consumers, we needed to create capabilities that would allow underserved citizens throughout the world to manage and move their money in a more secure, faster, easier, and less expensive manner. We needed to bust the paradigm in financial services that it is “expensive to be poor.” It was an inspirational vision of how PayPal could make a difference in the world.

Focusing on benefits, not challenges, is a good way to increase your aspiration.

I decided that we had to reorganize PayPal to implement the new strategy. The company had been organized by function, with engineering separate from products. We reorganized into just two groups: merchants and consumers. That forced us to focus on the real needs of both sets of customers and on our goal of creating innovative and compelling value propositions for them.

A Suite of Targeted Products

Within those two segments, we have created or acquired a suite of products that target different markets. For instance, Venmo is our payment product that serves the Millennial market. It uses smartphones and social networks. Suppose you go to a concert with a friend and you need to pay him back for the ticket. Instead of handing him cash or a check, you can transfer the money on Venmo. There’s a social aspect to it that’s very important. Your friends can see what you’re doing with whom on your social networks through your payments. The secret sauce of Venmo is that we turned a basic transaction into a social experience. As a result, it has become an extremely popular way to move money, and Time magazine ranked it the third most popular app in the country.

We’ve also acquired a company called Xoom, which is the leading international player in digital payments. Xoom gives people the ability to move money internationally via their mobile phones. So there’s no standing in lines. It costs half what traditional international remittance providers charge. It’s the perfect example of meeting a consumer need by making it easier and less expensive to manage money.

For merchants we created a product called PayPal Working Capital, which lends money to small businesses that use our service. Unlike most lenders, we don’t rely on credit scores. We have a proprietary algorithm that looks at a merchant’s history with PayPal, and that data gives us the confidence we need to make a loan. We’ve lent more than $2 billion, and if you look closely at the data, you can see interesting trends. One-quarter of the loans have gone to businesses located in U.S. counties that have seen 10 or more bank branches close over the past several years. The companies we’ve lent to have grown by an average of 22%, whereas a control group of comparable companies have averaged growth of less than 2%.

We’ve also opened up our platform and partnered with a variety of companies, including Facebook and Visa. As the explosion in mobile devices continues, partnerships become more important. And we’re working closely with governments, regulators, the International Monetary Fund, and the World Bank. Digitizing money requires an ecosystem—you can’t do it alone.

I still carry some cash, but over the past decade I’ve learned what an inefficient form of currency it is. For one thing, it’s not secure—think of all the theft and loss, and of how much businesses spend trying to protect their cash. Even for consumers, the existing system of money is expensive. Last year in the United States, people spent $138 billion on unnecessary fees and interest attached to moving and managing money. If our technology platform can help them save 50% of that—and provide incentives to save and invest more—we can help drive financial health and, we hope, enable consumers to realize their hopes and dreams. PayPal is already the world’s leading financial technology company. As we shift to being a customer champion, we’ll be able to drive even more shareholder value. There’s no disconnect at all between those things. Solving pain points for customers is always the right thing; it’s both a competitive advantage and a legacy of which we can be proud.

A version of this article appeared in the December 2016 issue (pp.35–38) of Harvard Business Review.